Further papers on signaling and education

Pursuing this topic, here are some of the good or interesting papers I discovered:

This UK piece reframes the David Card IV literature in terms of signaling and with UK data estimates that signaling accounts for one-third of the educational wage premium. It uses a “compulsory” instrumental variable from earlier UK schooling reforms.

Here is the Hanming Fang paper (IER): “…productivity enhancement accounts for close to two-thirds of the college wage
premium.” It uses very different techniques, based on simulations, not IV and the like.

This paper shows that rank measure in class doesn’t affect earnings, contrary to what signaling theories should predict. This may be a puzzle for learning theories as well.

Here is a good piece (it ended up in the JPE) which shows signaling must have some import; it does not attempt to estimate how much of the educational wage premium is due to signaling.

This paper suggests that signaling may be especially important for MBAs.

This Carneiro, Heckman, and Vytlacil paper I found impressive. It redoes much of the IV Angrist and Card work with greater emphasis on heterogeneous agents and also heterogeneous margins. It seems to be the current peak of the IV approach and finds rates of return in the 15-20 percent range and that is for college. It also finds that lower ability individuals are harder to educate and therefore reap lower (though still high) marginal rates of return, contra some of the simpler IV papers.

This very interesting Kevin Lang paper argues that signaling theories do not diminish the case for education and also that they do not create particular problems for measuring the social rate of return on education.

If you believed that the signaling value of education was high, you would expect to find a canny employer hiring high school graduates who didn’t attend college on the basis of SAT, ACT, test scores and substitute them for college graduates. Yet, I do not see employers asking for these scores, even from those who partially attended college. I also have trouble looking at this as an either or matter.

Yancey WardJuly 9, 2011 at 10:59 am

you would expect to find a canny employer hiring high school graduates who didn’t attend college on the basis of SAT, ACT, test scores and substitute them for college graduates

.

Can an employer even do this legally if they wanted to? And even if legal, what are the risks involved with regards to being sued?

BillJuly 10, 2011 at 10:41 am

I don’t see why not. Act and sat have been validated as nondiscriminatory for purposes of college admission. You are arguing that it relates to job results. No different than asking for high school grades or graduation.

Everything is not a lawsuit.

DKJuly 9, 2011 at 5:44 pm

There are signals about things other than sheer cognitive ability (conformity, conscientiousness). Those come from things like being able to jump through a lot of stupid hoops for years in a row. Also, employers frequently signal to clients through their employees’ credentials. Finally, hiring based on SAT/ACT only will run into legal problems for majority of employers.

JasonLJuly 10, 2011 at 5:35 pm

This.

CarelessJuly 9, 2011 at 11:12 pm

You’re a lawyer, shouldn’t you know that would wind up being illegal? Colleges are allowed to discriminate based on SAT scores. Businesses are not

BillJuly 10, 2011 at 10:43 am

Support that claim. I don’t see it for reasons above. I’ll cite Tyler and say college graduation is signaling and not predictive.

BillJuly 10, 2011 at 11:09 am

I don’t do employment law, but Act has been validated as a measure of high school aptitude and predictive of the ability to do college work. I could see how you could have aproblem if you used it for hamburger flippers, but the discussion here was as a substitute for college grad or slightly less positions, and it would seem reasonably and predictably related to prospective performance if you believe in signaling as the value of college.

Translation: “When I looked at all the studies and filtered for agreement with my position, regardless of the actual merit of the paper, here is what I found.”

DKJuly 9, 2011 at 5:30 pm

Exactly right.

nazgulnarsilJuly 9, 2011 at 10:21 am

college seems to be a conscientiousness proxy in the same way standardized tests are an IQ proxy.

regJuly 9, 2011 at 10:55 am

Employers would be liable in discrimination claims if they used ACT and SAT tests for hiring determinations. It’s against the law to use a test that has an adverse impact on minorities unless there’s no other way to distinguish prospective employees. Of course, a college degree is another way.

.July 9, 2011 at 4:24 pm

is this for real? How on earth do those tests discrimate against minorities?

CarelessJuly 9, 2011 at 11:16 pm

They don’t have to actually discriminate against them, legally they’re “discriminating” if you have a certain level of gap between groups and you can’t provide an extremely good reason (not just “this will save many lives) for using the test.

Tyler, where would you put the network effect of attending a good college in your ongoing education debate with Bryan Caplan and Arnold Kling? It’s a real increase in someone’s social capital but it exists more because of how institutions help with sorting and has less to do with the actual education of the students.

The Dale and Krueger paper,Estimating the Payoff to Attending a More Selective College: An Application of Selection on Observables and Unobservables, showed that white students who were accepted but chose to go to less elite schools did not earn less than other students with similar characteristics who chose to go to less elite schools (http://www.nber.org/papers/w7322). Although the study was not set up to test the signaling hypothesis, it seems that it does. Elite colleges and universities are a signal that the student is more accomplished than the a student who has gone to a less elite institution (even among academics). But if the signal is not working here, doesn’t that suggest that signaling is weaker than Caplan and others have argued?

wd40July 9, 2011 at 11:01 pm

Correcting a typo: The Dale and Krueger paper, Estimating the Payoff to Attending a More Selective College: An Application of Selection on Observables and Unobservables, showed that white students who were accepted to elite schools but chose to go to less elite schools did not earn less than other students with similar characteristics who chose to go to elite schools (http://www.nber.org/papers/w7322). Although the study was not set up to test the signaling hypothesis, it seems that it does. Elite colleges and universities are a signal that the student is more accomplished than the a student who has gone to a less elite institution (even among academics). But if the signal is not working here, doesn’t that suggest that signaling is weaker than Caplan and others have argued?

Sebastian HJuly 10, 2011 at 4:39 pm

Using ACT or SAT scores would be impermissible IQ tests which would definitely open your company up to lawsuits if you used them in a way which had an adverse impact on minorities. Since protected minorities do proportionally worse on both tests, you would be begging for trouble to use the tests.

Here is the Hanming Fang paper (IER): “…productivity enhancement accounts for close to two-thirds of the college wage premium.”

The assumptions of the model limit its applicability to the real world, of course. The model assumes that ideal compensation for linear increases in productivity are also linear; or in other words, that someone without the signal or the education could provide the same functions to a business, only at a lower rate, that all products are being sold to consumers with the same marginal utility for money. However, this does not match the pattern for purchases made in the real world, where there are different qualities of goods and services, not just different quantities, and the increase of objective utility of objects with their price is by no means in proportion to the “production efficiency” needed to create them. In other words, “signalling by consumers distorts the payoff for signalling by employees”.

But generally speaking, it does benefit a society to have signals, if those signals are accurate and measure what people expect them to. A signal will have decreased or even negative benefit to society if it becomes too inaccurate, so one of the objectives of a society should be to find and retain quality signalling methods.

More specific weaknesses of the model:
– I assume that each agent has two characteristics (a, v) wherea ∈ A is his innate ability in efficiency units and v ∈ V is his utility cost of attending
college in monetary terms. weakness: there are costs that cannot be made up for with a higher wage after the completion of college.

– It is assumed that an agent privately observes his characteristics, but it is commonly known that in the population (a, v) is distributed according to a joint c.d.f. G. weakness: measuring systems have utility for the individual apart from signalling, because the individual often does not know their own characteristics. The distribution of performance is also often not commonly known in a population.

– Firms behave competitively in the labor market. weakness: many companies have a specific culture of “values” and try to hire people that will fit in with the culture, such as when companies selectively hiring people that graduated from the same educational institution as current employees; in other words, non-financial motives in both hiring and product placement decisions.

Most importantly, “Stage 3: Test signal. The firms observe a noisy but informative signal, θ ∈ [0, 1], about whether or not the agent is skilled.” weakness: in the model used, skill is acquired at additional cost independent of general efficiency progress from education. Many employers do not test at all for skills for people who are unable to send a signal, heavily distorting the rewards for signalling. In other words significant problems arise when high school education does not even result in a wage offer of minimum wage.

In general, estimation of the value of a signal becomes difficult because it depends on both the goals of potential transmitters of signals, and also the progress that is represented in the signal’s measurement which will change over time as when multiple standards are all purported to represent the same signal; this causes changes in the distribution of competence for both those signalling and those who choose not to signal. This change in the quality of a signal over time is, perhaps, one of the larger problems with trying to quantify the value of a signal such as in this paper.